Differentiation Advantage

The nature of differentiation

Differentiation and segmentation
Analyzing differentiation: the demand side
Analyzing differentiation: the supply side
Bringing it all together: value chain analysis
OUTLIN
E
The Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESS
differentiation not just about the product, it embraces the whole relationship
between the supplier and the customer.
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics relating to image,
status, exclusively, identity
TANGIBLE DIFFERENTATION
Observable product characteristics

size, color, materials, etc.
performance
packaging
complementary services
DEFINITION: Providing something unique that is valuable to the
buyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
a market.
SEGMENTATION: is concerned with where a firm competes
within a market.

Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION: Appealing to what is in common
between different customers
(McDonalds hamburgers, Honda cars,
Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes
different customer groups (BMW, Doc
Marten footwear)
Differentiation vs. Cost Leadership as a Basis for
Sustained Competitive Advantage
Highest returns to shareholders among the Fortune 200, 1990-2000
Av. annual return (%) Av. annual return (%)
Cisco Systems 73.4 Microsoft 35.4
Oracle 65.1 Safeway 35.2
Solectron 61.7 Freddy Mac 34.8
Dell Computer 56.9 Washington Mutual 34.4
Best Buy 51.3 J.P. Morgan Chase 33.3
Applied Materials 49.8 Pfizer 32.1
Sun Microsystems 45.2 Lowes 31.6
Merrill Lynch 41.1 Enron 31.3
CitiGroup 40.8 Walgreen 30.7
Intel 38.2 Wells Fargo 30.1
Goldman Sachs 38.2 Cigna 30.0
General Dynamics 38.1 Cardinal Health 29.6
Texas Instruments 36.3 Tech Data 29.4
UnitedHealth Group 35.7 Houshold International 29.4
QUESTION: Which is the primary basis for competitive advantage
in the above companies: cost or differentiation?
Differentiation and the Product Life Cycle
New packages of hardware
and software introduced
SYSTEM
Augmentation:
repackaging of
hardware and
software
PRODUCTS
& SERVICES
Decommoditization
COMMODIT
Y
PRODUCTS
& SERVICES
Commoditization
Desystematization
: some packages
unbundled
Analyzing the Demand Side
Techniques for analyzing product attributes and
positioning:

Multidimensional Scaling
Conjoint Analysis
Hedonic Price Analysis
Differentiation in Pain Relievers:
Multidimensional Scaling of
Competing Products in the U.S.
High
Low
Low High
EFFECTIVENESS
GENTLENESS
Tylenol
Bufferin
Excedrin
Bayer
Anacin
Private
label
aspirin
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
THE
CUSTOMER
What needs
does it satisfy?
By what
criteria do
they choose?
What
motivates
them?
What are key
attributes?
Relate patterns of
customer
preferences to
product
attributes
What price
premiums do
product attributes
command?
What are
demographic,
sociological,
psychological
correlates of
customer behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
Select product
positioning in
relation to product
attributes
Select target
customer group
Ensure customer /
product
compatibility
Evaluate costs
and benefits of
differentiation

SYSTEM PRODUCT



SERVICE COMMODITY

SUPPORT
(SOFTWARE)
Differentiated Undifferentiated
Differentiated
MERCHANDISE
(HARDWARE)
Undifferentiated
Differentiation of Hardware and Software
Consistency of Differentiation
Strategy: Product Integrity
Key to successful differentiation is consistency of all
aspects of the firms relationship with its customers.

Product Integrity: the total balance of product features
Internal integrity: consistency between
function and structure
External integrity:fit between the product
and the customers
objectives, values, lifestyle
etc..
Producers strategies
High quality Low quality

High 7 10
Consumers price 7 -5
strategies
Low -5 3
price 10 3
Note: In each cell, the lower left number is the payoff
to the consumer and the upper right number is
the payoff to the producer.
The problem of experience goods : quality can only be
ascertained after purchase. Hence: Prisoners Dilemma:-
Equilibrium reached with consumer paying a low price for a low quality item.
If producer can signal quality--- both consumer and producer can move to
preferred position: high quality product carrying a high price
Problem of Quality in Experience Goods:
A Prisoners Dilemma
The Impact of Quality on Profitability
Low 25% 60% High
Relative market share
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Low 25% 60% High
Relative market share
Low 25% 60% High
Relative market share
ROI (%) Relative Price Relative Direct Cost
Conclusion: Increases in quality add more to price then they do to cost.
19 28 38 107 107 108 104 103 101
14 20 28 103 104 104 104 102 100
7 16 23 101 101 102 104 102 100
Using the Value Chain to Identify
Differentiation Potential on the Supply Side



FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports
fast response
capabilities
Training to support
customer service
excellence
Unique product features.
Fast new product
development
Quality of
components &
materials
Defect free
products.
Wide variety
Fast delivery.
Efficient order
processing
Building brand
reputation
Customer technical
support. Consumer
credit. Availability of
spares
Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture
1. Distinctive can design can assist canners marketing activities.
2. High manufacturing tolerances can avoid breakdowns in customers canning lines.
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers ordering costs.
5. Competent technical support can increase canners efficiency of plant utilization.
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CANNER CAN MAKER
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